Teresa Carballo (teresacarballo@pacifica.legal, https://x.com/teresacd)

This article concludes my participation as a Legal Scholar for the Ethereum Foundation, where I had the chance to attend Devcon with bright minds in the Ethereum Ecosystem, forever thankful ♥️.

Delegates occupy one of the most distinctive (and interesting, I must add) roles within decentralized governance systems. These pages aim to analyze this figure from multiple perspectives and principally answer the question, who are delegates accountable to?

In the context of this analysis, delegation can be defined as the process by which token holders transfer their on-chain governance rights to others.

Preliminary Considerations

1. Given the unique nature of each governance system, no standardized analysis can fully capture the delegate role across multiple protocols or networks. Projects often provide guidelines for delegate participation, including codes of conduct which will always vary.

2. Delegates often participate in specialized committees with distinct mandates, roles that should be considered separate from their primary delegate function. Examples include the Anticapture Commission in Optimism and the ArbitrumDAO Procurement Committee. Members of these committees are typically elected through governance votes, or due to their reputation, for defined terms.

3. The relationship between delegates and their delegators varies significantly. While many delegators remain anonymous or pseudonymous, others have formal agreements, or delegates are specifically hired to manage project delegations.

4. This analysis approaches the delegate role primarily through a Civil Law framework and incorporates perspectives from a Latin American political background (meaning I´m biased to what I know, and how I was taught to interpret the law).

5. As of today, in decentralized governance systems, only certain decisions are proposed or left to be analyzed and decided by delegates. In many instances, the core team, separate committees, a foundation, (or a combination of these) retain most decision-making authority or hold veto power (until full decentralization is met, but that's a separate topic).

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The word "delegate" derives from the Latin "delegatus," meaning "to send as a representative" or "to entrust to." According to the Royal Spanish Academy, the word "delegado" is defined as "For a person to give (to another) authorization to substitute or represent them in their functions."

Political Science Insights

Political science provides valuable perspectives to draw parallels from traditional political systems, I will focus on two main questions.

1. Are delegates bound to act according to the explicit instructions of their electors, rather than their own judgment, is their unique role to transmit the expressed preferences of their constituents into political decision-making processes?

If we take as an example Panama's legislative system (because of course, I´m Panamanian), when our National Assembly representatives take their oath of office, they promise to serve not just their local electoral circuit, but the entire Republic. This creates a natural tension that every representative must navigate. While they're elected by local voters, their decisions affect the whole nation.

In the above-mentioned point, I want to remark on the difference between local (municipalities) and central government positions. If I had to make a comparison between national governments and blockchain-related governance positions, I would say a delegate would certainly be at a national level, serving the central government.

The Civil Law tradition, especially in Latin America, recognizes this complexity/ duality. It sees representatives as part of something bigger than their local constituency. They're pieces of a national puzzle, working together to serve the greater good. This doesn't mean ignoring local interests, but rather viewing them through the lens of national welfare. Most democratic systems have concluded that while representatives must listen to their constituents, their highest duty is to the nation as a whole. 

1. How are conflicts of interest managed in the public sector?

Conflicts of interest refer to situations where an individual or entity in a position of authority in the public sector faces competing obligations or interests that could compromise their ability to perform their duties impartially and in the public's best interest.

Most jurisdictions have clear legislation on addressing conflicts of interest in the public sector. These laws typically require obligated individuals to submit formal declarations regarding their assets, commercial interests, and personal relationships to prevent conflicts in the performance of their duties. Additionally, they outline investigative procedures and establish transparent processes for removal from office in cases of non-compliance.

On the first question, I would conclude that delegates face similar challenges, balancing the interests of specific token holders against the health of the entire protocol ecosystem. However, as in local governments, the common good should take precedence. Regarding conflicts of interest, it is crucial to uphold these foundational standards within a blockchain-related environment.

Private Law Perspective

In an International environment, the concept of delegation in corporate law has been explored by several leading scholars. Robert Clark laid the groundwork in his 1986 "Corporate Law," defining delegation as the board of directors' transfer of specific authority to officers or committees while maintaining their oversight responsibility. Stephen Bainbridge later expanded this foundational understanding in his 2009 work, where he described corporate delegation as an authorized transfer of decision-making power between corporate bodies or individuals, emphasizing the preservation of fiduciary duties throughout the process.

When we examine these concepts in the context of a Panamanian Corporation "Sociedad Anónima", I wouldn´t equate the figure of delegates to directors, delegates would be a separate representative and advisory body, who would respond to those who appointed them, but should act in good faith towards the general interests of the corporation, a few questions remain to understand who are they accountable to, and should be addressed in a case by case scenarios, as were delegates appointed by the board of shareholders? by a specific shareholder? or by the board of directors?

We can also find similarities between the role of a delegate and a mandate contract "mandato". A mandate contract obligates one person to provide a service or perform an action on behalf of another, a mandate can be either express (established through public or private instruments, or even verbally) or tacit -as well as its acceptance-. There are interesting parallels to delegation in governance systems, particularly in how the relationship can be formalized in various ways and the acceptance can be demonstrated through actions rather than formal declarations.

This traditional legal concept of mandato helps us understand the fundamental nature of delegation, whether in traditional corporate structures or modern decentralized systems. While the means of execution may have evolved, the basic principle remains one party acting on behalf of another, with corresponding rights and obligations.

In a private law context, it is extremely relevant to understand where is the direct relationship coming from, because delegates are directly accountable to their delegators.

Effective Control and Risks Associated with Delegation

It is important to note that while the previous analysis serves as a reference, the concept of delegation in decentralized governance presents numerous differences from the traditional systems we have known so far, and it is crucial to consider its unique aspects, such as fluid delegation through token mechanisms, instant delegation revocability, the possibility of multiple simultaneous delegations, open community discussions, reputation-based accountability, and the cross-jurisdictional nature of these systems.

Based on these characteristics, there is an important aspect we should consider when analyzing the figure of delegates and the possible associated risks, of who has the effective control of the governance tokens.

The reality is that the ability to re-delegate is a key aspect to answer this, token holders always maintain ultimate control, while delegates only maintain influence over decisions. And ultimately, whoever has final control of something also maintains the associated responsibilities.

This doesn´t mean that delegates can´t also misrepresent the token holder and may manipulate decisions in their favor, which might not be the intention of the token holder. Also, the majority of token holders who have delegated their votes do not commonly review decisions made by their delegates. So, there could also be risks associated with delegating.

Past September in the Uniswap Protocol Governance forum it was brought up that "Recently, it has come to light in private communications that some DAO delegates and participants may have been subpoenaed in connection with their activities within the DAO, some in highly alarming and threatening situations." while many details weren´t disclosed, such as the jurisdiction or authority soliciting information (we can imagine it was in the U.S.) delegates and delegators, should understand associated legal risks particularly related to the legal uncertainty crypto-related projects are facing in certain jurisdictions.

Delegates and delegators should be aware of the legal uncertainties facing blockchain projects in certain jurisdictions. Depending on the jurisdiction where you or the legal entity through which you act as a delegate operate (highly recommended to limit your responsibility), procedural factors such as the proper method of notification for legal orders can vary significantly. You may or may not have a legal obligation to comply with such notices, and obtaining specific legal advice is always a good idea.

Other potential associated risks include financial losses or damages caused by particular governance decisions, and authorities perceiving that the governance participants engaging in regulated activities without proper licensing in certain jurisdictions, or illegal activities. While this article focuses primarily on risks associated with delegation, it is crucial to understand that token holding itself involves distinct legal risks, several court cases highlight these challenges.

Incentives

A crucial criterion that we should consider while answering the initial question of who are delegates accountable to is the incentives that may exist behind participation.

Here I can establish two main possibilities:

1. Incentives that come from the delegators.

As an example, A16z has open-sourced its delegation program, which includes a stipend for delegates, and a clear agreement between delegates and delegators, as many other investment firms who hold a large number of tokens, their delegates would owe fiduciary duties to them.

The concept of fiduciary duty here deserves special attention. In traditional legal frameworks, fiduciary duties require acting in the best interest of the one you are representing with loyalty and care (as we were taught in university, like a good pater families). As it was mentioned earlier when discussing delegates in a private law context, it would be completely correct to act in favor of their interests. However, in decentralized governance, the lines become blurred, should delegates prioritize their direct delegators' interests, or do they have a broader responsibility to the protocol's ecosystem as a whole?

2. Incentives that come from the network or protocol.

On the other hand, a large number of projects have economic incentives for delegates who actively participate and meet certain criteria. Other than these there are a series of expectations and codes of conduct that participants of the ecosystem should meet.

The presence of these incentives raises important questions about alignment and potential conflicts of interest.

The impact of incentives on delegation becomes particularly relevant when considering the long-term sustainability of decentralized governance systems and the professionalization of the delegate role. As more structured programs emerge, understanding these incentive mechanisms becomes crucial for evaluating delegate performance and accountability.

A few questions that this analysis brings up are, how do different incentive structures influence delegate behavior? can multiple incentive sources create competing loyalties? how do we ensure incentives align with the best interests of both delegators and the broader protocol?

Interesting Initiatives 

An interesting initiative I´ve seen from the recently developed ZK Nation has been the ZKsync Austrian Association which Delegates must join to participate in governance proposals, it's the first time I´ve seen an entity particularly constituted for this purpose, possibly to segregate liabilities on the Delegates side, but until the moment the articles of incorporation haven't been made publicly available. An interesting point about these associations is that members do not need to KYC to become part of the Association, but would be interesting to see how this case would be treated in litigation.

While drafting this article, I realized that, as in life, there are always more questions than answers. There are foundational principles and numerous criteria to analyze, but every situation must be weighed on a case-by-case basis. The particular actions of delegates must be one of those considerations. I am left with questions to debate and, ideas to implement as we continue to foster innovation, always aiming to minimize potential risks.